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DreamWorks sticking with HD DVD? - February 27, 2008

From the WTF? files comes the bizarre news that DreamWorks Animation remains committed to releasing its movies exclusively on HD DVD despite the fact that Toshiba has ceased shipping new HD DVD hardware, effectively killing the format. In an interview Tuesday with Reuters, DWA CEO Jeffrey Katzenberg said the studios is waiting to hear back from Toshiba on what it wants DreamWorks to do with its upcoming releases.

"We have a partnership with Toshiba and have an obligation to see this through," Katzenberg told the news agency. "As you know, we have been well-compensated for our support. It really is in their court at this point to really declare what the next step will be. We're poised either way to jump into the marketplace when the conditions are right to do so."

Actually, we didn't "know,"  we only suspected, because Katzenberg had declined to confirm any "compensation" when reports of such first surfaced, but never mind. Surely, Toshiba couldn't care less at this point what DreamWorks does with its titles. So what possible reason could DreamWorks have to "see this through?" Presumably to try to persuade Toshiba to "see through" its obligation to DreamWorks.

According to the New York Times, Toshiba paid DreamWorks and Paramount $150 million last year to secure their exclusive support for HD DVD--the "well-compensated" agreement Katzenberg is now copping to. Contrary to popular assumptions at the time, Media Wonk never believed that Toshiba sat down and wrote a check for $150 million in cash payable to DreamWorks and Paramount. Far more likely, it seemed, was that Toshiba committed funds to help market and promote specific upcoming releases from the two studios, an arrangement that would be far more valuable to the studios because it would help drive sales of standard DVDs as well--the most important piece of the revenue pie the studios.

Let's assume, as Rich Greenfield of Pali Research does, that Toshiba committed $100 million to help market "Shrek the Third," "Bee Movie" and the upcoming "Kung Fu Panda." (Why did DreamWorks get more than Paramount? Because Katzenberg negotiated the deal and because Toshiba needed some big-name animated pics to counter Disney's exclusive support of Blu-ray.) Now let's assume DVD sales of "Shrek the Third" fell well shy of "Shrek 2," due to the general slowdown in the DVD market and competition from videogames, as Katzenberg did in DWA's Q4 earnings call yesterday, and you're facing a difficult comp in 2008 over 2007.

That would certainly make you keen for any help you can get to squeeze the most possible units out of "Bee Movie" next month, as well as "Kung Fu Panda" later this year. Keen enough, perhaps, that you'd be prepared to look slightly ridiculous by putting those titles out on a dead high-def format if it meant not letting Toshiba out of the contract to provide promotional support. Whatever you would have sold on HD DVD even had Toshiba not pulled the plug (or on Blu-ray for that matter) would be too small to be material anyway so whether you put it out or not in high-def doesn't matter financially.

What does matter financially--especially when you only put out a few movies a year--is driving sales of standard DVD units on every title. I'm sure Katzenberg will do everything he can to hold Toshiba to its end of the deal.
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